The Race to Produce the World's Cleanest Car: Company Strategies

Abstract

The spring of 2000 presented the Big 3 U.S. automakers–General Motors, Ford, and Daimler-Chrysler–with a curious situation: On the one hand, they were clearly behind their Japanese competitors in introducing high-efficiency, low-emission vehicles into the American marketplace on a large scale. Two Japanese firms—Honda and Toyota—had begun marketing so-called hybrid vehicles in the U.S., Japan and Europe, while the earliest any American automaker predicted selling such vehicles was 2004. This lag was all the more disappointing as the United States government had backed a cooperative effort between the Big 3 to develop such vehicles for several years, and had invested several hundred million dollars in the initiative, apparently to no avail. As the Japanese raced forward with aggressive promotional campaigns for their new alternate fuel vehicles, gasoline prices in the American market climbed sharply, further improving the prospects for these new products. At the same time, aggressive new emission standards were being introduced in a number of U.S. states. Several studies had, in fact, predicted that the world would begin running out of oil by the middle of the 21st century.

However, there were serious questions as to whether the Big 3 should worry at all about being “behind” the Japanese in the race to market high efficiency vehicles. Buoyed by a record-breaking economic boom, American consumers were purchasing an all-time high number of cars and trucks, with most of these being relatively fuel-inefficient sport utility vehicles (SUVs) and light trucks. Several executives in Detroit questioned whether “being behind” the Japanese in this segment of the business mattered at all.

The case study examines the U.S. government's Partnership for a New Generation of Vehicles (PNGV), an initiative aimed at bringing American automakers together to produce a high efficiency vehicle by 2004. The case presents the various strategies pursued both by the Big 3 U.S.-based auto manufacturers, and by Toyota and Honda, the two firms who had introduced high efficiency models by 2000. Among the questions raised by the case are how far a company can and should go in responding to social concerns while pursuing traditional economic goals, and how difficult it is for firms to make commitments to particular technologies in a rapidly evolving marketplace.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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Glossary

Electric vehicles

First produced in 1888 in Europe, there were more than 20,000 electric cars and some 10,000 electric buses operating throughout the United States by 1912. 1 However, the gasoline-powered internal combustion engine, with its greater range and flexibility for drivers, soon condemned the electric vehicle industry to extinction. It was not until the mid 1990's that electric vehicles again attracted commercial interest. In December of 1996, in response to California's “zero emission vehicle” mandate, General Motors began marketing a two-seat coupe powered by a lead acid battery. The new car, named the EV-1, was initially only made available through Saturn dealers in the states of California and Arizona. Electric vehicles offered several advantages to both automakers and consumers. In terms of the auto manufacturers, electric vehicles were truly zero emissions vehicles, thus complying with the stringent California emissions mandates. Electrics were extremely quiet when running, and offered the consumer the benefit of freedom from oil changes, tune-ups, or exhaust system replacement.

However, the batteries used in the EV-1 were quite costly and made the vehicles very expensive. To alleviate the “sticker shock” to consumers, GM only offered their electric models on a lease basis. Still, monthly payments on the GM EV1 were close to $500/month, well above what most consumers would be willing to pay for a two-seat vehicle. The batteries were also large, heavy, and somewhat underpowered. As a result, the vehicles had to be recharged every 80 to 90 miles. The recharging process on the electrics could take anywhere from four to six hours, another serious inconvenience in the eyes of many consumers.

Fuel cells

The fuel cell generates energy by passing hydrogen molecules through a membrane to join oxygen on the other side. The electrons that remain become the electric current for the fuel cell. The motor on a fuel cell-powered vehicle was actually the same basic motor used in all-electric vehicles such as the GM EV-1. In marked contrast to the electric batteries used in the EV-type vehicles, however, a fuel cell never discharged its power, and hence never needed recharging. The fuel cell itself was a true zero-emissions system, outputting only water vapor.

First produced in the late 1950's, the major problem with early fuel cells was their size. A fuel cell resembles an oversized compact disk in its case. Since one cell does not produce enough power to move a car, fuel cells have to be stacked on top of each other, requiring still more space. Another issue is the source of the hydrogen supply. Since hydrogen is rarely found in pure form, it must be separated from other substances such as natural gas, to be used as fuel. Two solutions to the hydrogen supply question are to either store it on board in pressurized tanks, or to install some type of “reformer” to separate hydrogen from some kind of fuel such as gasoline. Either option requires further space in the vehicle.

However, as interest in fuel cells began to increase in the early 1990's, significant progress was made in addressing the space issue. In early 2000, engineers were able to install a working fuel cell system under the floor and seats of a compact Ford Focus. At the same time, researchers made tremendous strides in the range of fuel cells. In 1997, both Daimler and Toyota were able to produce prototype vehicles that attained between 250 and 310 miles on one tank of methanol.

Another difficulty with fuel cells is the distribution system. If future fuel cell cars use a liquid fossil fuel, such as gasoline or methanol, from which hydrogen is extracted on board the vehicle, the nation's existing fuel distribution network could be utilized. However, separating hydrogen from fossil fuels involves some loss of energy as carbon is separated from the fuel. The technology to separate hydrogen from fossil fuels is complex, and requires the inclusion of extensive machinery in each vehicle.

Having fuel cell vehicles carrying their own supply of pure hydrogen on board has pitfalls as well. Pure hydrogen is highly combustible, and the storage tanks would take up a significant amount of space in the vehicle. Furthermore, the nation's existing network of service stations are not equipped to distribute pure hydrogen, and would require investment of many billions of dollars.

Hybrid vehicles

Also initially produced in the late 1890's, hybrid vehicles were based on the idea of having two power systems, an internal-combustion engine, (usually gasoline-powered, but sometimes diesel) and an electric motor. There are two types of hybrids, series and parallel. In a series hybrid, a small gas or diesel engine generates power for an electric motor and recharges a small battery carried within the car. In a parallel hybrid, both the gasoline/diesel engine and the electric motor could propel the car independently, though they could also operate at the same time to give the vehicle added power. Some parallel systems were designed to have the vehicle start on battery power, then automatically shift to the gasoline/diesel engine when the batteries had lost a considerable amount of their charge.

The first commercially produced hybrid was the Toyota Prius, first sold in Japan in 1997 and introduced into the American market in the spring of 2000. This was followed by the Honda Insight, first marketed in the fall of 1999.

The hybrid offered the benefits of reduced emissions and high fuel efficiency. However, its complex design made production costly. Another problem was that hybrids still generated some emissions, and received only partial credit towards meeting the California mandate of 10% of car sales in the state being zero emissions vehicles In fact, a byproduct of the diesel engines used in some hybrids was increased nitrogen oxides in the exhaust, a major contributor to smog.

Note

1. Pahl, G. (November 18, 1998). The shocking truth about electric cars. Vermont Times, pp. 1-17.

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This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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